For Greece, the Outlook Is Still Grim

Landon Thomas, Jr.|The New York Times

Friday, 27 Jan 2012 | 11:21 AM ETThe New York Times

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Even as Greece tries to convince creditors that its debt-reduction efforts are on track, gloomy new International Monetary Fund forecasts about its long-term economy are threatening to derail talks meant to secure the nation’s next big installment of bailout funds.

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The concerns, stemming from an analysis that the I.M.F. has been quietly sharing with European officials and Greece’s creditors in recent weeks, come at a crucial time for Athens.

The new Greek governmentis in dual-track talks with private and public sector creditors, trying to make the case that its program for reducing long-term debtis working. The government seeks to persuade private creditors to provide relief by taking some losses on their bond holdings, and to persuade its public sector lenders to release a scheduled allotment of bailout money, possibly as much as 30 billion euros ($39 billion).

Without that next payout, the nation is almost certain to default when a bond repayment of 14.4 billion euros ($18.7 billion) comes due in March.

The repercussions of a default would be hard to predict. But it could create a contagion of financial fear that could spread to other weak euro zone economies and force Greece to become the first nation to leave the 17-member euro currency union, a departure whose social and political ramifications might also defy prediction.

A key to securing the next bailout payment could be Greece’s reaching a new debt-revamping agreement with its private sector bondholders. Charles H. Dallara of the Institute of International Finance, the group representing the private creditors, was to meet Thursday evening in Athens with the Greek prime minister, Lucas D. Papademos. There was no word about the status of those talks by late Thursday.

Negotiations between the two sides have foundered twice already over disagreement on how much loss private investors should be willing to absorb on bonds.

As Greece’s woes have escalated, so have its demands on the amount of loss the creditors should accept. While creditors have said they would be willing to accept a loss of 70 percent on their new bonds, Greece and its backers have been pushing for more by demanding that these securities carry an interest rate below 3.5 percent.

Greece is effectively bankrupt, staggering under a debt load that the I.M.F. now estimates as equal to about 160 percent of its gross product, with an economy so weak the government can no longer meet debt payments on its own. That is why it is to receive as much as 130 billion euros ($169 billion) in bailout money under an agreement struck last October with the so-called troika: the European Union, the European Central Bank and the I.M.F.

In return for regularly scheduled installments of that money, however, Greece is supposed to be meeting strict economic reform and budgetary targets.

Greece’s last bailout package was underpinned by an I.M.F. analysis that forecast a debt-to-G.D.P. ratio of 120 percent by the year 2020. Now the I.M.F. is forecasting a ratio that could rise to 135 percent by that year, largely because of a collapsing economy that shows no sign of reversing course.

The new projections cast new doubt on whether Greece can ever escape its downward financial spiral without defaulting on its debts.

Greece’s economy is estimated to have shrunk by more than 6 percent in 2011. Some specialists say they believe that the downturn for this year could be as much as 5 percent. And the general sense among economists from the troika of public institutions financially supporting Greece is that the economy has not yet found the floor.

“We have become much less optimistic on growth,” said one official from the group, who was not authorized to speak publicly. “And if growth falters, the debt-to-G.D.P. ratio goes up. One cannot be in denial of this reality.”

Bankers familiar with the details of the new I.M.F. forecast say it has been held up as the main reason private sector bondholders should be forced to accept a larger loss on their Greek securities. In recent days, top European officials and the managing director of the I.M.F., Christine Lagarde, have talked about how European institutions might have to contribute more funds to keep Greece afloat.

Adding to lenders’ worries is the possibility of trouble in other heavily indebted parts of the euro zone. Borrowing costs in Italy and Spain — the big economies whose debt loads have caused the most worry after Greece —have been coming down lately. But the yield for 10-year Portuguese bonds are near 14.3 percent. The high yield reflects growing concern that Portugal, another recipient of bailout funds, might default as well.

The roadblocks

Greece’s most recent bailout agreement was based on two assumptions: that the private sector would voluntarily accept at least a 50 percent loss on its debt, and that these savings, together with other changes to be undertaken by the government, would bring Greece’s debt down to 120 percent of G.D.P. by 2020.

But the new I.M.F. forecast for Greece presents the disturbing prospect that even after years of spending cuts and tax increases, Greece will have a debt burden in 2020 that is not sufficiently lower than its current load.

The fund’s gloomier outlook has been influenced by three primary factors, bankers and officials say. One is the economic slump within the entire euro currency region that I.M.F. economists are forecasting for 2012, a problem that economists refer to as an external shock for Greece beyond its control.

But the other two elements stem from the nation’s continuing difficulty in meeting targets set for it by the European Union and the I.M.F.

The second element is Greece’s budget deficit, for which a target had been set at no more than 8 percent of G.D.P. for 2011. Economists now estimate that the actual deficit number was around 10 percent, because of weak tax collection and continued high spending within the public sector.

The third factor is the new Greek government’s continued difficulty in passing legislation that would lead to the long-term economic change its European rescuers are demanding. This week, for example, Greek legislators rejected a proposed law that would have forced the nation’s pharmacies — long seen as a symbol of the protected and uncompetitive local economy — to stay open more hours each day.

Although the Greek Parliament did pass other laws that liberalized areas of the economy, the defeat of the pharmacy bill, and continuing union opposition to government demands for lower wages, underscore how difficult it will be for Greece to return to a path of economic growth.